I have been reading "The Entrepreneurial Earnings
Puzzle: Mismeasurement or Real?" a working paper by Thomas Åstebro and
Jing Chen, that looks at the research literature on entrepreneurs' earnings
(paper available here).
See the paper for a literature review; research generally finds, among other
things, that entrepreneurs earn on average less than employed workers and work
longer hours, and continue to do so despite having better opportunities by
being an employed worker.
With a supposed earnings disadvantage, why would anyone choose
to be an entrepreneur willingly? Åstebro and Chen specifically investigate if the
earnings gap between self-employed and employed workers is due to underreported
income of the self-employed. They base their analysis on food consumption
patterns—take two people with the same income, self-employed and employed workers,
and see how their food consumption differ. They find that self-employed spend
more on food than similar employed persons, suggesting an underreporting of
income by the self-employed by significant degrees. This assumes that food
preferences are the same across individuals (among other assumptions), so the
authors conclude that this is partial, suggestive evidence of underreporting of
income. Regardless, it does not account for other theories on why people choose
to become entrepreneurs.
My primary takeaway about entrepreneurial earnings:
"In general, predictors of entrepreneurial
earnings are weak... As researchers, we must remain humble regarding our
ability to explain or predict entrepreneurial success. By far the most
prominent explanation is chance."
I'm trying to square two seemingly contradictory trends. First, as we've known for several years, geographic mobility in the United States is today half of what it once was. This applies to interstate, intrastate, and intra-county moves. At the same time, apparently, we are living in a new era of freelancing and independent work, such that 58 percent of Millennials surveyed called themselves an entrepreneur because of freelancing work. That Forbes article also references an Intuit study purporting to find that 40 percent of US workers will be freelancers in 2020, only seven years from now. That seems astoundingly high, and would seem contrary to the steady downward trends in mobility, which predate the recession.
So what's going on here? One possibility is that the data are wrong. It seems unlikely that decades of Census data, based on IRS records, are incorrect. Self-reported survey responses seem a likelier candidate for error. It's important to note, too, that the Intuit report identifies "contingent employees" and contractors as the source of this freelancing growth, which is not necessarily the same as what we typically associate with freelancers. The latter term has a certain romance about it and conveys a sense of independence and control which, not surprisingly, are the attractions identified in the Millennial survey.
Identifying oneself as a "contingent employee" doesn't really have the same ring to it and, in fact, probably highlights some economic forces at work here. I was speaking to someone the other day whose twenty-something daughter is a freelance illustrator who wants nothing more than a steady job. Companies utilizing the services of freelance illustrators, according to this one source at least, solicit samples based on a proposed project--with the condition that the company owns the resulting intellectual property. What inevitably happens is that scores of freelancers submit bids, one is chosen, and the company is free to use the other "free" bids.
Contingent employees and contractors are not owed benefits and so are perhaps a more attractive option for companies in certain sectors. A few years ago, the IRS made noise about cracking down on companies' classification of workers as freelancers and contractors, but I'm not sure where that ended up. In any case, we should take care when celebrating the increase in freelancing because it's not always the romantic notion we assume it be. And it's notable that such large percentages of people in the aforementioned survey said they wanted to leave their job to be independent--no word on the subsequent revealed preferences and resulting satisfaction. Self-employment rates have not risen alongside the reported increases in freelancing, with the exception of a one percentage point increase in the incorporated self-employed.
(Worth another blog post: lots of people seem to equate freelancing with being an entrepreneur. That's one of the points of the Forbes article, that "being an entrepreneur" today is more about freelance work than starting and building a company. That's highly debatable.)
But the larger puzzle remains: if freelancing is really on the rise and set to rise further, why has geographic mobility been falling, and will that suppress the expected increase in freelancing?
It could be the case that people reporting themselves to be freelancers still hold a steady day job and engage in supplemental work through places like Etsy. So perhaps we are missing large chunks of economic activity. Perhaps a rise in freelancing actually explains falling mobility? If you are a freelancer/contractor/contingent employee, depending on the sector, you need to be in a location with a dense concentration of relevant companies. The illustrator mentioned above would probably have more difficulty in Helena, Montana, than New York City. This presumes that the physical density of some industries has been rising; I don't know to what extent that is true.
Alternately, the opposite could be true: perhaps the severing of the relationship between physical location and work means these footloose workers choose a place to live based on quality of life because all they need is an Internet connection to manage their freelance/contingent career. That would also presuppose a narrowing of the places that are attractive to freelancers. In its last State of Metropolitan America report, the Brookings Institution pointed out that while the country as a whole is aging, certain metro areas are actually "younging" because they have become magnets for twenty- and thirty-somethings. If it's true that Millennials are more predisposed to the contingent career than older Americans, this could mean a close link between freelancing and immobility. (At the same time, however, self-employment rates are generally much higher among older age groups.)
So I don't know what to think. Geographic mobility is undoubtedly down; we know that. Perhaps this "boom" in freelancing is a combination of self-reported classifications and people engaging in more freelance activity on the side, while they continue to hold down a job. And I suppose that with more companies using contingent labor--perhaps facilitated by the Affordable Care Act's exchanges--these two seemingly contradictory trends could continue to coexist. Or maybe all freelancers and contractors and contingent workers will simply move to the states that set up those health exchanges.
I have tended to stay away from reposting from other blogs so I don't clog up people's feeds with spam, but Tyler Cowen has pointed out something irresistible.
Facebook - the world needs yet another Myspace or Friendster except several years late. We'll only open it up to a few thousand overworked, anti-social, Ivy Leaguers. Everyone else will then join since Harvard students are so cool.
Dropbox
- we are going to build a file sharing and syncing solution when the
market has a dozen of them that no one uses, supported by big companies
like Microsoft. It will only do one thing well, and you'll have to move
all of your content to use it.
Amazon - we'll sell
books online, even though users are still scared to use credit cards on
the web. Their shipping costs will eat up any money they save. They'll
do it for the convenience, even though they have to wait a week for the
book.
Virgin Atlantic - airlines are cool. Let's
start one. How hard could it be? We'll differentiate with a funny safety
video and by not being a**holes.
Mint - give us all
of your bank, brokerage, and credit card information. We'll give it back
to you with nice fonts. To make you feel richer, we'll make them green.
Palantir
- we'll build arcane analytics software, put the company in California,
hire a bunch of new college grad engineers, many of them immigrants,
hire no sales reps, and close giant deals with D.C.-based defense and
intelligence agencies!
Craigslist - it will be ugly. It will be free. Except for the hookers.
iOS
- a brand new operating system that doesn't run a single one of the
millions of applications that have been developed for Mac OS, Windows,
or Linux. Only Apple can build apps for it. It won't have cut and paste.
Google
- we are building the world's 20th search engine at a time when most of
the others have been abandoned as being commoditized money losers.
We'll strip out all of the ad-supported news and portal features so you
won't be distracted from using the free search stuff.
Github
- software engineers will pay monthly fees for the rest of their lives
in order to create free software out of other free software!
PayPal
- people will use their insecure AOL and Yahoo email addresses to pay
each other real money, backed by a non-bank with a cute name run by
20-somethings.
Paperless Post - we are like Evite, except you pay us. All of your friends will know that you are an idiot.
Instagram - filters! That's right, we got filters!
LinkedIn
- how about a professional social network, aimed at busy 30- and
40-somethings. They will use it once every 5 years when they go job
searching.
Tesla - instead of just building batteries and
selling them to Detroit, we are going to build our own cars from
scratch plus own the distribution network. During a recession and a
cleantech backlash.
SpaceX - if NASA can do it, so can we! It ain't rocket science.
Firefox
- we are going to build a better web browser, even though 90% of the
world's computers already have a free one built in. One guy will do most
of the work.
Twitter - it is like email, SMS, or RSS.
Except it does a lot less. It will be used mostly by geeks at first,
followed by Britney Spears and Charlie Sheen.
There is a lot of buzz out there these days about crowdfunding. As Kauffman Dissertation Fellow Ethan Mollick at the University of Pennsylvania’s Wharton School puts it, "Crowdfunding has been drawing substantial attention from policy makers, managers, and entrepreneurs, but relatively little notice from academics, even though it touches on many topics of importance to scholars of entrepreneurship."
His paper from last July, "The Dynamics of Crowdfunding: Determinants of Success and Failure" (available here), examined almost 47,000 projects on Kickstarter that raised a combined revenue of $198 million. Mollick concluded that several factors influence whether a project will succeed or not:
The greater the size of the founder's social network, the greater the chance for success (particularly Facebook in this case; this is also known as the 'be popular' strategy).
The underlying quality of the projects – those with high-quality, polished pitches are more likely to be funded (e.g., use a video; as Kickstarter's website states, "Projects with videos succeed at a much higher rate than those without.").
A strong geographic component tie-in seems to increase success (pitching country music in Nashville, film in Los Angeles, etc.).
A shorter Kickstarter duration is better (35 percent chance of success for 30-day pitches, 29 percent for 60-day pitches). Mollick noted that a longer duration implies a lack of confidence in the project’s success.
Being highlighted on the Kickstarter website is hugely beneficial (89 percent chance of success vs. 30 percent for unfeatured projects).
A large number of creative individuals in the city where the project is based is associated with greater success (target these kinds of people).
Geographic Distribution of Projects by Success
The circles on this map represent counts of Kickstarter projects by city; the larger the circle, the more projects based in that area. The shading within the circle reflects the portion that were successful—dark green represents successfully funded projects while light green indicates the project was not funded. Based on Mollick's research, odds are that the successfully funded projects in given cities were a good fit culture-wise for that city.
The Kauffman Foundation will be writing some papers on crowdfunding in the near future – stay tuned!
Yasuyuki Motoyama and I have a paper out today about 1 Million Cups (1MC), a program of Kauffman Labs for Enterprise Creation. 1MC brings together entrepreneurs weekly on Wednesday mornings--two startups talk about their businesses for about six minutes each, followed by Q&A for twenty minutes with the audience, which is compromised of anyone who wants to attend, typically other entrepreneurs, mentors, advisers, and other
supporters of entrepreneurship. The program is free and as the name suggests provides ample coffee to attendees. We conducted a survey of attendees of the program back in November 2012, or roughly seven months after the program first launched in Kansas City.
There is a press release about the survey findings from Kauffman here; the paper is here; we have an article in Huffington Post about some high-level findings going up later today and I will update this post when it goes live. **Update: Huffington Post article is here. Last but not least, Jordan Bell-Masterson put together an interactive
chart about some of the survey data about other Kansas City programs here.
I think the paper is particularly relevant for community organizers who are starting new programs, especially in small to medium-sized regions. I'm tempted to write more but it would just be regurgitating what is written elsewhere, so I'll just say check out the paper if you're interested in learning more.
In 2012, the Kauffman Foundation partnered with LegalZoom to
conduct a survey series of new business owners in an effort to establish a
broader range of metrics than are available in more traditional data sets. Q1-Q4
saw confidence surveys that helped shine light on entrepreneurs’
particular take on consumer confidence and overall economic health.
At year’s end, we followed up on these confidence indexes
with a final survey of 1,431 newly incorporated
businesses focused on identifying founder and venture characteristics. The
official report already offers a good summary of the
important details gleaned from the data, so let’s instead explore some of the
data’s limitations and what they mean for this survey and entrepreneurship
statistics beyond it.
The scope of the survey starts coming into focus with a
breakdown of the financing. When respondents were asked where they obtained
startup capital, personal funding dominated all other external sources (83% of
ventures used personal funding; 59% used it as the sole source). Investors
backed just 7% of ventures in the sample, and only 5% of owners secured bank
loans. With most funding coming out-of-pocket, we should anticipate these
businesses to be relatively small, and the data back up this expectation. 82%
of companies in the sample had revenues between 0 and $49k, and 70% had no
employees other than the owner(s).
Given our sample’s slender financial profile, it is
unsurprising that the top business type among respondents was “Consulting”
(followed by “Other” and “Service: Other Services”). First, we should account for the possibility of
selection bias here – self-employed consultants are likely to have more time and
therefore greater inclination to answer a survey than do owners with
responsibilities to multiple employees and complex revenue streams. Nonetheless,
we should not expect selection bias to account for the entirety of such a heavy
weighting toward this type of business activity.
Accordingly, we should be wary not only of our own data’s
limitations, but also of any statistics on small business which do not specify
revenue or employment. For example, should a city or state boast responsibility
for having “x” new businesses started in 2012, it’s worth the deeper dive to
see how many of those will truly be impact businesses that bring jobs and money
to the region. The research of Davis
et al. demonstrates that nonemployers can and do migrate to the
employer-universe, becoming a substantial source of revenue and growth in the
period surrounding the transition.
Nonetheless, only 3% of nonemployers ever make this transition, meaning
that our sample’s economic footprint is bound to be very limited given the size
of the survey. Nonemployers of all
stripes play a role in the economy, but policymakers will want to focus
primarily on those with growth aspirations, making “new businesses” with no
further distinction a crude, weak metric.
Finally, perhaps more interesting than any information
contained in the survey was the information that couldn’t be included. Among the respondents, 91% worked on their
business for more than a month before incorporating. 60% worked on it for more
than 6 months, and 35% did so for over a year. This is the black box of
entrepreneurial studies, and the biggest problem facing the field: how do we
obtain information about businesses in that crucial planning and preparation
period? Could we only obtain information about that window of time with
retrospective surveys, and if so would the data be tainted by the imperfections
of memory? If we were able to contact
entrepreneurs as they toiled through the development phase, would the very act
of observation change their actions and invalidate the experiment? We may be no
closer to answering these questions today, but our respondents have soundly
reaffirmed the need to try.
How much do individual entrepreneurs really matter to their firm’s performance? We intuitively suspect and
anecdotally hear about how hugely important the individual entrepreneur is to a
firm. A working paper by Sascha O. Becker and Hans K. Hvide, “Do Entrepreneurs
Matter?” (available here)
puts some numbers and analysis behind intuition.
Becker and Hvide look at roughly 65,000 Norwegian firms established
between 1999 and 2007, in particular studying firms where the entrepreneur dies
before 2009 (so firms are between zero and eleven years old in this sample). In this case, an entrepreneur
is defined as an owner with at least 50 percent ownership, though most of the
analysis focuses on entrepreneurs with more than 50 percent ownership (341
instances).
They find that firm performance drops significantly after an
entrepreneur’s death relative to other similar firms that do not experience a
death event: on average, four years after an entrepreneur’s death, sales drop by
about 60 percent, employment drops by about 17 percent, and firms have 20
percent lower survival rates two years after the entrepreneur’s death. The
effects appear to be long lasting and firms show no signs of recovering from
them.
We can say with some certainty that there is causality here—that
the entrepreneurs have a causal effect on the growth of the firm—because the
authors conduct a series of robustness checks to address many potential questions
about the strength of their findings.
No significant
differences:
Are the negative effects of an entrepreneur’s
death only for firms that were performing poorly and would have had poor
performance anyways? No, the effects occur for firms across all levels of
pre-death performance.
Are the negative effects of an entrepreneur’s
death temporary (i.e. a period of turbulence and then return to normal)? No, the
immediate effects are small relative to sustained effects that accrue over
time.
Do more mature firms fare better; does the age
of firm matter? No, the negative effects are largely independent of the age of
the firm, although more mature firms fare slightly better with survival rates.
Does the age or gender of the founder matter;
does the death of an older founder (60 years or older at founding) have less of
effect? No significant differences are found.
Do family firms fare better or worse; does it
matter if the entrepreneur was married? No significant differences are found.
Do firms in urban areas, with a greater and denser
supply of entrepreneurs, which could serve as replacements, differ from firms
in rural areas? No.
Does the size of the firm matter? Only minor
differences are found for small firms relative to large firms.
Is the reverse happening: does poor firm
performance lead to the entrepreneur’s death? The authors do not have data
about the health of the entrepreneur or cause of death. However, they can
compare the pre-death performance between firms that experience a death and
those that do not and find there are no pre-death differences in performance. This
suggests that death comes unexpected or that health issues are not significant
enough to affect firm performance.
Some differences:
Does the firm having team ownership matter? Yes,
negative effects of the death of an entrepreneur still occur but are lessened. When
Becker and Hvide lower look at owners with just a 50 percent share (204
instances) or a less than 50 percent share (495 instances), they find similar
negative effects, but just less severe. For 50 percent owners, the effects are
about half as large relative to greater than 50 percent owners (majority
owners; the main analysis); for less than 50 percent minority owners, the
effects are quarter the size of the case of majority owners.
The loss of greater levels of human capital has
a more pronounced negative effect. The death of entrepreneurs that are highly
educated (more than 12 years of formal education) have greater negative effects
relative to other entrepreneurs; firms that are in sectors that have on average
a higher education level experience greater negative effects from a death event
relative to firms in other sectors.
Getting back to the main findings, the authors do not know
why there is such a stark difference between the drops in sales (60 percent)
versus employment (only 17 percent). They suggest as one possibility that the
entrepreneur has spillover effects on employee productivity which would hurt
sales proportionately more (i.e. leadership in sales, or was a great salesperson),
but don’t have strong evidence to present. This will be an area for future
research.
I think this research serves as a precautionary tale to
startups that will unfortunately face unexpected life events. Besides an
entrepreneur’s death, other unexpected life events could see an entrepreneur
suddenly removed from their firms. I am not convinced this research
extrapolates to founder removal due to internal firm conflicts where a decision
is made (either by majority of co-founders or investors), because those
decisions are made by choice.
Dane and I have a policy brief out today that looks at a few possible scenarios of job creation that could result from a startup visa (paper is here; press release summary is here). The Startup Act 3.0 bill proposes to create 75,000 visas for immigrant entrepreneurs who found companies. We estimate this could result in, at a minimum, somewhere between 500,000 and 1.6 million jobs created after 10 years. The legislation calls for 75,000 visas to be active at any given time, meaning that 75,000 visas could be filled and then no new visas would be issued until one of those slots opened (presumably because a startup failed or the startup graduates from the visa program). Employment projections would be much larger if the pool was expanded or if visas were allocated annually. More details and caveats about how we constructed the scenarios are available in the paper.
Just as there are many reasons a person chooses a spouse, numerous factors determine whether or not venture capitalists or angel investors will fund a company. The traditional and most frequently studied reasons include market size, past performance, and the company's future projections. But that's not everything. "This approach, widespread though it is, fails to consider that an investment in an early-stage company is a decision to commit to a business idea and, just as importantly, to an entrepreneur who will lead the business idea," says Kauffman Dissertation Fellow Lakshmi Balachandra, an assistant professor at Babson College. In her Ph.D. dissertation (abstract and executive summary here) she examined two research questions regarding the role an entrepreneur's perceived trustworthiness has in an investor’s decision to provide capital:
How does the assessment of an entrepreneur's trustworthiness impact an early-stage investor’s interest in investing? For example, will entrepreneurs with economically viable/sound business models be considered for investment even if they seem untrustworthy? and
To what extent do behaviors and cues presented by the entrepreneur influence the investor to trust them and decide to invest in them, as opposed to economic aspects of the business?
To determine how trustworthiness played a role in funding, Balachandra looked at 101 videos of entrepreneurs pitching to angel investors and analyzed them based on the ultimate investment decision, post-pitch survey results, and the demographic information of the involved parties, as well as third-party ratings regarding the behavior of the entrepreneurs during their pitch.
Her results were as anticipated:
Investors’ assessment of the entrepreneur’s trustworthiness following the pitch directly impacts and moderates any interest in investing that they had from evaluating the economic factors of the business. I found that, as hypothesized, the economic factors of the venture are the primary consideration for angel investors. However, the investors' evaluation of the trustworthiness of the entrepreneur directly influences the way the investors then assessed the economic factors of the business. That is, when investors found the entrepreneur to be trustworthy, they rated the economic factors as more attractive as well.
The difference? A full 10 percent: "when entrepreneurs 'pitch' more trustworthiness, they are 10% more likely to have investors interest[ed] in investing in their business." So what qualities made an entrepreneur appear more trustworthy? Coachability or character (who a person is) mattered three times more to investors than competency (aptitude at a point in time and prior experience).
In considering if they can trust the entrepreneur from his/her pitch, investors must believe they can make up for any lack of competency of the entrepreneur. For example, if an entrepreneur doesn’t know financial accounting, a professional accountant can be hired to fill this knowledge gap. This is in stark contrast with character: there is no way for an investor to compensate for differences in character which I measured as coachability in my study. This quality is critical to the investor since if the investor invests, the investor will be working with the entrepreneur for the foreseeable future.
So what did these entrepreneurs actually do to appear trustworthy? (Since this is Practically Friday and all.) Most importantly, they:
Had a higher level of speaking skills and presentation ability (character and competency).
Had a greater number of social network connections, indicated by name-dropping (character and competency).
Were open and accepting of suggestions, feedback, and critiques (character).
Had a similar background/experience to the investor (character).
Tended to be younger (character).
Laughed more often (character).
While some of these cannot be changed (age and similarity to the investor, for example), others are in your direct control as an entrepreneur. So take a public speaking/presentation class, get out there and meet people, and make sure to relax and laugh during your pitch to investors. It just might make the difference between getting funded and not. Appearing (and being) more trustworthy can only help with those pesky romantic relationships, too.
Founders are kind of like married couples in terms of the intensity
and importance attributed to arguments, right? If you follow me on that point,
then the forthcoming paper (working paper available here)
“A Brief Intervention to Promote Conflict Reappraisal Preserves Marital Quality
Over Time” by Finkel et al. could help you with conflict resolution.
Married couples that were tasked with reappraising a recent significant
argument from a third party perspective reported significantly greater marital
satisfaction than those that did not receive in the intervention.
The intriguing aspect is that the intervention was very brief—devoting just seven
minutes once every four months. Additionally, the authors find the intervention was just
as effective for newlyweds as it was for long-married couples, so it appears the intervention would be effective regardless of your business’s
development stage.
Does sitting down to think about your feelings sound silly? Depends on the person. More importantly, does it work? It was highly effective in this study. I’ve
adapted the prompts in the paper (pages 6-7), substituting startup terminology for
original references to marriage.
Write down your most significant conflict
from the past four months, or more specifically, provide a “fact-based summary of
the most significant disagreement… focusing on behavior, not on thoughts or
feelings.” Now, think about it again:
Think about the specific disagreement that you
just wrote about having with your business partner. Think about this
disagreement with your business partner from the perspective of a neutral third
party who wants the best for all involved; a person who sees things from a
neutral point of view. How might this person think about the disagreement? How
might he or she find the good that could come from it?
Some people find it helpful to take this third
party perspective during their interactions with their business partner.
However, almost everybody finds it challenging to take this third party
perspective at all times. In your relationship with your partner, what
obstacles do you face in trying to take this third partner perspective,
especially when you’re having a disagreement with your partner?
Despite the obstacles to taking a third party
perspective, people can be successful in doing so. Over the next four months,
please try your best to take this third party perspective during interactions
with your business partner, especially during disagreements. How might you be most
successful in taking this perspective in your interactions with your partner
over the next four months? How might taking this perspective help you make the
best of disagreements in your relationship?
These directions really stress the importance and difficulty of taking on the third party
perspective. It’s hard to do. We’re first person viewpoint people by nature. But if you
can work on taking on that viewpoint, you could have much less conflict-induced
stress.
If you missed the 2013 Kauffman Foundation State of
Entrepreneurship event yesterday, a video of the entire program is embedded below. Other materials and event information are available on the official Kauffman website.
Event Video:
I’m focusing this post on the panel discussion that took place after
opening speaker remarks and Kauffman CEO Tom McDonnell’s address. I’ll organize
my thoughts about the panel discussion along three major points, with the
overarching theme that startup activity is on the rise:
Community support / geographies of startup
activity
Larger discussion of crowdfunding
High-technology startup activity compared to all
other industries
After quick introductions, moderator Robert Litan, director
of research at Bloomberg Government, set the
stage for discussion, quoting federal statistics about startup activity and
employment. A couple of other speakers at the event also referenced these stats;
I think the most concise presentation is in Reedy
and Litan (2011), which we’ve highlighted here on Growthology before, but
it bears showing again.
This chart demonstrates the downtrend in new startups since
2005.
The two charts above speak to the decrease in total
employment by startups and the decrease in their average starting size.
The data in these charts are only available up through 2010.
With this in mind, Litan asked the panelists what they thought more recent
years have looked like. My general sense is that the panel was in large
agreement that the current state of entrepreneurial activity is much more
positive—that is, they expect that these official data will show upticks when
additional years are added. This was, I think, the primary theme of the panel.
Here’s a one-sentence summary of their discussion: More platforms
enable community support of and participation in startup activities now more
than ever. There are, of course, more nuances to what was covered, which I detail
below.
When discussing trends, right off the bat, the topic of
geography came up, with many panelists echoing a theme we’ve discussed here
countless times—startup activity happens outside of Boston, Silicon Valley, and
New York. The panel offered examples like participation in the Startup American Partnership or the Kauffman
Foundation’s own 1 Million Cups.
A more informal measure was also given—an increase in
number and geographic dispersion in invitations to speak at startup-related
events. Speaking to general interest in starting up independent of geography, a
casual poll of Harvard Business School graduates was cited: Out of 90 students,
86 stated that either upon graduation or at some future point in their career
they want to start a business. Additionally, there is a reported 50 percent
increase in the number of HBS graduates starting up right after graduation. All
told, the panel spoke to a groundswell of interest in startup activity. We will
have to wait and see if this plays out in official statistics.
Related to this point, the panel spoke about recent
developments like crowdfunding (donations-based already available through
things like Kickstarter;
securities-based regulations still under development)1
and other investment platforms such as AngelList
that enable the discovery of different geographies of entrepreneurs and informs
investors about opportunities to invest in their local communities.
Thoughts on crowdfunding were peppered throughout the latter
portion of the panel, so it’s difficult to pull them as separate points, but I
shall try. Crowdfunder.com founder Chance
Barnett reported that rulings for securities-based investment by accredited
investors could be established relatively shortly, but there will be a longer
delay in rulings for non-accredited investors (predicted second half of this
year).
Generally speaking, I think I am correct to say that the
panel thinks that crowdfunding can be a good thing, particularly in light of
the catalyst role it can play in local communities, and that concentrating on
the potential negatives is not as productive. The panel did not say that there
are no concerns about crowdfunding investments not working out, but rather the
potential outweighs these issues.
In a point I’ll touch on next, in light of the increased
focus of venture capitalists on high-technology startups, crowdfunding could be
important in supporting startups in underserved industries.
I felt the panel offered a qualification on the first point
about increased startup activities. The panel went on to distinguish between
startup activity generally and startup activity in the high-technology
industry.
There were various comments about how high-tech startups are
increasingly ample in numbers and that this is a “hot” space—perhaps too hot.
There were comments that tech startups are well-served by the existing capital
ecosystem, but startups outside of this industry are being underserved, and the
panel called for paying increased attention to startups outside of the
high-tech sphere.
A Q&A session at the end offered the following nuggets:
Business plans as a process and procedure are
outdated (at least in the opinion of a panel member who is a venture
capitalist; I agree, for whatever that’s worth).
The panel is skeptical of venture capitalists who
say they will not invest in any startup that takes crowdfunding—will they
actually hold true to that principle when presented with the opportunity and
slew of data (read: market support) generated from crowdfunding?
Speaking to community support of startups,
bringing startups together—whether accomplished by entrepreneurs, the local
government, corporate citizens, or other community organizers—to create a dense
network of entrepreneurs is a task everyone in the community can take on; if an
outside entrepreneur comes in, your community should have an answer to the
question “where can I go hang out with other startups?”
A pitch for a free-agency model for university
faculty and technology licensing was presented, where faculty can pick any licensing
office they would like to commercialize a new technology (not limited to just
their own university; see Chapter 5 of Better Capitalism)
1 For more
background information on crowdfunding, see the Jumpstart Our Businesses Act
which was signed into law last year. Wikipedia has a decent summary.
To me, that bad press can be a catalyst for strategic change in a business is not a surprising research finding. That bad press can have no influence when a business is doing well is again not terribly surprising. These are some of the conclusions in a forthcoming paper, “Burr Under the Saddle: How Media Coverage Influences Strategic Change,” by Michael K. Bednar, Steven Boivie, and Nicholas R. Prince. The authors look at 40,000 articles covering 250 firms over the course of five years, analyzing how boards react to negative media coverage (abstract and gated copy of paper here; press summary here).
What I find a more interesting finding is that bad press has a greater effect on strategic change when a businesses’s board of directors is comprised of outsiders—independent board members with no previous ties to the firm’s management (such as being family, friends, or former business relationships).
I’m wary to post blasé “practical” advice like “be aware of the outside/insider composition of your startup’s board of directors.” I don’t find this kind of messaging particularly helpful, and I’ve sat through infinite numbers of talks/presentations with the bullet point “choose board wisely,” so I’m pretty sure people are hearing this message already. But when I read things such as Wasserman’s The Founder’s Dilemmas and see all the instances of founders being replaced at their startups (for various reasons), and then I see this research about insider and outsider dynamics in boards, I’m inclined to add some nuance to board composition and “choosing wisely.”
As your startup grows, it seems very likely that a board would grow to include both ‘insiders’ and ‘outsiders.’ These groups will have different behavioral characteristics, with one of them being the interpretation of bad news. Perhaps you can extrapolate this bad news sensitivity to a broader behavioral characteristic: outsiders place more weight on outsider information. That is, they are more willing to take cues from outsiders, for better or for worse. So as the composition of your board changes, perhaps adding more outsiders as the startup grows, be more prepared to deal with reactionary changes from any bad press. The struggle over strategy will be harder than it was in the beginning.
Ramana Nanda and Matthew Rhodes-Kropf have a working paper
out titled “Innovation
and the Financial Guillotine” (where guillotine refers to investors’ willingness
to kill an investment). Having your startup choose a strategy of high tolerance
for failure in theory helps your startup and your employees feel like they can
take risks to try something very innovative. The same goes for investors (and
governments)—choose to tolerate failure to promote innovation. When Nanda and
Rhodes-Kropf modeled investment choice decisions and their interaction with
failure tolerance, they find that choosing a broad strategy of failure
tolerance leads to funding less radical innovation and more incremental
innovation. The issue is that by promoting failure tolerance, you make it
harder to kill projects. Not being able to kill projects is a risky proposition.
My interpretation is that simplifying your startup or
investment choices by employing a broad strategy of failure tolerance is not a
good replacement for project-by-project considerations (the authors sort of get
at this but don’t say it directly, so I could be wrong).
A recent paper from Ernst & Young and the Kauffman Foundation looks at the cadre of 636 E&Y Entrepreneur Of The Year finalists from 2012 to see what makes them tick. These companies are high-growth and tend to produce disruptive innovations. They’re also not small – in the U.S. 95 percent of firms have fewer than 50 employees, while in this group only 18.2 percent fell into that size range.
In looking at these finalists for the Entrepreneur Of The Year (EOY) awards, eight key findings on why these companies succeed came to light that could be of use to other entrepreneurs and to would-be entrepreneurs. Here they are for this week's installment of Practically Friday:
Have a unique perspective on risk
As Magnus International Group founder Eric Lofquist put it, "It's funny – looking back, I never thought any of it was risky. Feeling so strongly about something: I didn't consider it a risk." That type of attitude drives the EOY entrepreneurs to meet unmet needs and solve problems with their businesses instead of sitting back and letting someone else do it.
Communicate vision and instill passion in great teams.
Finalists overwhelmingly stated that people were their leading priority, as opposed to more established companies worldwide, many of whom have been more concerned lately with efficiency and productivity increases (read: headcount losses) than developing their teams.
Demonstrate resilience and rapid recovery.
As Liberty Global president Mike Fries stated, "I don’t think you can really be successful without staring into the abyss at least for a little bit. Every entrepreneur has that moment, and your goal in life is to not have it a second time." Mistakes in high-growth companies are the price of progress, while in more-established companies they often just lead to the blame game.
Embrace innovation.
Established companies are often resistant to radical innovations that may benefit them in the long term but harm their revenue streams in the short term. Successful entrepreneurs know that innovation is the lifeblood of company survival and economic growth.
Pursue what you do best.
Partner with existing corporations to handle infrastructure and technology needs, sales channels, administrative functions, regulatory compliance, or manufacturing and distribution (to name a few) so your high-growth company can focus on what it does best and scale more rapidly and cost effectively.
Pursue geographic expansion.
The majority of the EOY finalists surveyed included geographic expansion in domestic and international markets as part of their growth strategies.
Secure the right capital at the right time.
Funding sources differed by companies' level of revenue, and EOY entrepreneurs accessed a wide range of finance options to grow their businesses.
Preserve what you've built.
As these high-growth companies grow and mature, EOY finalists were most concerned with preserving their company culture, attracting and retaining top talent, protecting and enhancing their company’s brand and reputation, and retaining their best customers.
While the Ernst & Young EOY finalists tended to own companies on the larger side, the findings of this survey apply more broadly to any entrepreneur wishing to grow a company. Mega-entrepreneur Richard Branson has similar advice for small businesses (it's all about the team, do what you do best…), as does entrepreneur Rosalind Resnick for home-based businesses (do what you do best, have some kind of support team, geographically expand, embrace innovation…).
As Bryan Pearce, director of Entrepreneur Of The Year put it, "Our Entrepreneur Of The Year finalists and winners have 'cracked the code' for achieving extraordinary growth in challenging economic times. Their exemplary way of doing business creates jobs and enriches communities while demonstrating how it is possible to defy the gravitational undertow of economic stagnation."
On any given Friday you can find teams convening at a half
dozen or so Startup Weekends occurring
around the globe. In these instances, the teams of developers, designers and
others interested in tech startups move ideas to concepts to minimum viable
products in just 54 hours. A panel of judges declares one prototype the best of
the weekend, and with a bit of luck and a lot of sweat that team might turn it
into the next great high-growth business.
What we’re going to see over the next two weekends is a bit
different. More than 130 Startup Weekends – an unprecedented and awesome number
– will kick off around the world as part of Global Entrepreneurship Week,
featuring 1200 teams competing not just against those in the room with them,
but against every SW team around the world. The winners at each site will go head-to-head
via recorded pitches and, with the final 15 still standing, a jury of
accomplished entrepreneurs and investors will pick the winner. It’s called Global Startup Battle, and there’s
never been anything quite like it at this scale. Yes, there are some (pretty
great) prizes for the winners, but that’s not really the point. If you’re not
already participating, follow the action on the Global Startup Battle website, on Twitter and Facebook, vote for your
favorite teams, and watch more than 10,000 people around the world in real time
building some great products, some maybe not-so-great ones, but all diving
head-first into the entrepreneurial experience.
A few weeks ago the Reddit
Internet Tour bus stopped at the Foundation. Over barbeque and a live
twitter stream, Alexis Ohanian had a discussion with 4 entrepreneurs about
what’s important in startups, community, and life.
Naithan Jones, founder of the exciting AgLocal,
and former Kauffman Foundation colleague gave a piece of advice not often
associated with startups: get some sleep.
Turns out, there is a lot scientific research to back him
up. Besides physical health, sleep helps our memory formation and ability to
learn (here,
here
and here),
emotional processing (here) and
performance in procedural skills like driving (here
and here). You can’t
problem solve as effectively or engage in optimal decision making when you are
sleep deprived.
But when even 24 hours don’t seem to be enough to knock out your
work list, shortening your working hours to 16 can be a tough sell. While
significant benefits are seen after 8 hours of sleep, there are also benefits
to a few hours of sleep and as little as 6 minutes of sleep. Polyphasic sleep
refers to alternate sleeping schemes in which sleep is broken up into multiple
sessions, usually reducing sleep time to 2-6 hours. Below is a nifty infographic outlining
predominant patterns. Green dots indicate REM cycles while red space indicates
the rest of the sleep cycle.
There is a catch, however. The less total sleep, the
stricter the schedule must remain for naps. In the two and three nap “Everyman”
variations you shouldn’t miss your nap by more than a couple of hours, and the
“Uberman” method requires naps be within 30 minutes of their allotted spot.
This could be difficult for many. In most workplaces in the U.S. midday naps
wouldn’t be well received. However, you’re an entrepreneur and besides your
consistent sleep deprivation one of the other hallmarks of your profession is
that you make your own schedule.
I've been following Google Fiber news for a while (and am still waiting for it to come to my neighborhood--Summer 2013, fingers crossed), and I read in Silicon Prairie News that the first houses in Kansas City are now being hooked up. It's becoming real.
Photo courtesy of Nate Olson, a colleague here at the Kauffman Foundation.
The homeowners are part of a group of KC startups in Hanover Heights (the first Fiberhood) that call themselves KC Startup Village. These startups have specifically moved to Hanover Heights to have Google Fiber available for their companies, and are actively recruiting other startups to join them. They've provided some cell phone video of the technician's exterior work. The KCSV blog reports as of a few days ago the interior installation was still incomplete.
In the video, the technician states [speculates?] Google Fiber is going to Dallas next, but in the SPN article Google clarifies that the next Fiber location has not been decided.
Noah Smith wrote a post over the weekend where he expresses concerns over what he terms the Entrepreneur Subculture:
Well, in the past few years, I've been reading - and hearing - a lot
about the Entrepreneurship Subculture. You all know what this is. It's
mostly young people, mostly in urban areas (especially SF and NYC). It's
mostly (but not exclusively) made up of entrepreneurs in the fields of
technology and media. It includes media outlets like TechCrunch, books like The Lean Startup, "incubators" like YCombinator, forums like Quora, and other outlets like the TED and TEDx talks.
First, I'd like to address this above description Smith offers before I talk about his concerns.
Smith qualifies by using the word "mostly" three times, but this still to me looks like he's talking about the idea that the average entrepreneur is a twenty something, in Silicon Valley, and working on an internet startup.
Even if this is not what Smith intends to convey, this is a common perception. And it is simply not true. As we have covered here before on Growthology, entrepreneurs are not, on average, young, and we've talked about how they are not mostly located in San Francisco and New York City, and do not work only on tech and media (see our Inc. 500 research here). Concerning geography, here is the map of the Inc. 500 firms over time (an interactive version is available at the previous link):
And here is a relevant excerpt with statistics on the industry question (from this paper in the Inc. series):
At the nationwide level, only a quarter of Inc. firms are in conventional high-tech sectors, such as IT and Health and Drugs, and the industrial sector distribution is extremely wide, including Business Services (10.2 percent), Advertising and Marketing (8.6 percent), Government Services (7.3 percent), Construction (3.8 percent), and the rest. At the metropolitan level, we observed regional variations and specializations. Government Services in Washington, D.C., was the best example; other cases include Advertising and Marketing in New York City and Los Angeles, Business Services in Chicago and Atlanta, and Health and Drug firms in Dallas.
I note discussion in another part of Smith's post and in the comments about the relevance of venture capital--we've covered that here too, manytimes, and it bears repeating, most entrepreneurs never receive venture capital (or angel) investment.
Returning to Smith's main message--he asks if we have an entrepreneurship groupthink problem. Dane has wondered about this previously as well. Does the Entrepreneur Subculture insulate? If policy makers and the media focus on entrepreneurs, and if entrepreneurs are more and more in close collaboration with one another, will the same ideas end up being recirculated and groundbreaking innovations become even more rare? The potential for problems is definitely there.
I think Smith is right on the mark when he advises that entrepreneurs should take breaks from this Subculture experience. I have an illustrative story that squares directly with this idea. I attended the Inc. 500|5000 annual conference in Phoenix earlier this month. One of the presentations was from GoPro (the durable, hi-def, and compact camera) founder Nick Woodman, who came up with the two big innovations for GoPro while pursuing his passions. He came up with the idea for the first camera (not able to record video at first) when he thought about capturing his experiences on a surfing tour vacation--the first GoPro was a camera you strapped to your wrist. Later after the company had developed rudimentary video cameras, he was learning to drive a race car and realized that a camera that could be strapped to your wrist could just as easily be mounted to a roll bar. Take a break; discover big ideas while having fun.
Aside from vacations, there are ways to take quick breaks too. There's a popular concept in computer programming concerning rubber ducks. When troubleshooting code, put a rubber duck next to your keyboard and force yourself to explain the problem to the rubber duck. Talking it out to an uniformed thing is helpful. Entrepreneurs might find rubber ducks helpful too as a quick break. But more generally I'm thinking about real life rubber ducks. Rid yourself of the name dropping, the "do you know/have you heard of __ ?" question banks, and forget all the acronyms by talking and explaining things to non-entrepreneurs (I include myself in this camp), and frequently don't talk about entrepreneurship at all. Talk about e.g. the unfathomably good Homeland.
It will also be up to us--organizations like the Kauffman Foundation and others that support entrepreneurs--to speak up, present research-backed evidence, and provide feedback surrounding policies and practices concerning entrepreneurship. Maybe we should start handing out rubber ducks and be sure to use them in our own work.
The issue of occupational licensing has been a topic on this
blog previously (here,here,
and here).It
is a topic that received due attention from bloggers and economists alike.
Using new data from a Thumbtack.comsurvey of small business owners
we once again confirm the difficulty occupational licensing presents for
entrepreneurs. However, instead of objecting to enforcement of regulation, many
business owners actually complained there wasn’t any enforcement at all.
State and local governments have laws on the books they are
not enforcing and in doing so they are actively encouraging moral hazard. Feedback
from individual business owners across the country indicates that those
individuals who do not adhere to regulatory standards are promptly allowed to
keep operating while business owners who have crossed their t’s and dotted their
i’s are left out the cost and time of a license, potentially disadvantaging
them. A system that provides incentives to skirt the law is one that creates
inefficiency. State and local governments would be better off slashing any
requirements they are not fully ready to enforce.
